Revocable trusts give the settlor(s) complete control over the trust. He or she may amend, revoke, or terminate the trust at any time. The settlor(s) can take back the funds he or she put in the trust or change the trust’s terms. Therefore, the settlor(s) can reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death. Revocable trusts are generally used for the following purposes:
- Asset management. They permit the trustee to administer and invest the trust property for the benefit of one or more beneficiaries of the trust.
- Probate avoidance. At the death of settlor,the trust property passes to whomever is named in the trust. It does not come under the jurisdiction of the probate court and its distribution need not be held up by the probate process. However, the property of a revocable trust will be included in the settlor’s estate for tax purposes.
- Tax planning. While the assets of a revocable trust will be included in the settlor’s taxable estate, the trust can be drafted so that the assets will not be included in the estates of the beneficiaries, which helps avoid taxes after they die.
- Disability planning. Wills only provide for death, living trusts can help a person have a plan in place in the event of their own illness or incapacity.
An irrevocable trust cannot be changed or amended by the settlor(s) unless there are specific provisions to do so. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself. For instance, the settlor may set up a trust under which he or she will receive income earned on the trust property, but the trust bars access to the trust principal. This type of irrevocable trust is a popular tool for long-term care planning. In addition, irrevocable trusts are often used with life insurance policies as an estate tax planning device.
A testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the settlor is probated. Although a testamentary trust does not avoid the need for probate, and becomes a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For example, the testamentary trust can be used to provide funds for a surviving spouse that would be protected if she required Medi-Cal assistance for nursing home care, an option that is not available using a revocable or living trust.